Second, contrary to the guarantee, no formal condition is required to establish a compensation agreement, i.e. it must not be written or signed. Case study: Company X wants to buy new manufacturing equipment and has to borrow a million dollars from a bank. When negotiating the contract, the Bank will ask Company X to provide a financial guarantee for the loan. Company X will then turn to a guarantor, Company Z, who will sign a guaranteed contract and add it to the loan agreement with which Z will agree to repay the loan if Company X is late in payment or does not meet its obligations. This is not a “transaction” because the definition of loss in the loan agreement and the compensation at issue do not prejudge a transaction between two different legal entities and different divisions of the same bank. Nor could it be considered a “financing transaction” since it was not a transaction carried out by the Bank to finance the facility to borrowers. Guarantees and compensation are used by borrowers to protect themselves against the risk of debt default, which means that they are unable to meet their loan contract obligations. Because of their function, lenders will generally seek a guarantee or compensation, especially if they have doubts about the borrower`s creditworthiness. In short, lenders seek additional collateral by having a guarantor/exempt taker to cover the borrower`s obligations under the loan agreement. A compensation agreement tends to be beneficial to the beneficiary.
First, as has already been said, the compensation contract creates a primary obligation that applies even if the corresponding contract is cancelled. It is therefore more forceful, since the modifications or modifications of the corresponding contract do not affect compensation, since the other remains liable to the beneficiary. First, the court had to decide whether this clause applies to advances. The borrower argued that the indemnity clause applied only to the “repayment” of the loan and not to the “down payment.” The loan agreement clearly distinguished between the two and had a separate down payment clause that defined the fees to be paid at the time of the down payment. It argued that any ambiguity against the bank should be interpreted as the editorial party (contra proferentum). The bank argued that this analysis was patently flawed and made no commercial sense under the agreement. In most cases, the guarantee documents include a support allowance to enable the beneficiary (lender) to benefit from both agreements. Development is therefore essential to avoid errors and ambiguous formulations.
In the event of uncertainty, the court will choose the interpretation that is less restrictive for the surety, i.e. the undertaking at issue is considered a guarantee. As a result, the benefit of compensation for the beneficiary is lost. A guarantee is a contractual commitment by which a surety agrees to be responsible for the proper performance of a third party`s (borrower)`s obligations to the secured party (lender) if the third party does not meet those obligations. It can have two forms: if the payment of capital and interest to the lender is guaranteed, it is called conditional payment guarantee. If the guarantee agreement relates to the third party(borrower)`s compliance with its obligation, it is classified as a pure guarantee. In Barnett Waddington, when the bank entered into the credit agreement with the borrowers, it also entered into an internal hedging agreement with another department of the bank. The loan agreement provided that borrowers would compensate the Bank for costs “incurred in the liquidation of financing transactions related to the facility.” When the borrowers wanted to pay the loan in advance, the bank tried to charge them about $2 million in termination fees, which it said was due to the internal swap.